When I first started to type this post, it was two weeks ago, right during the height of Google / Groupon speculation. During the frenzied week of and a half of speculation, before it became clear that no deal would take place at this time, a lot was written for and against the acquisition taking place. In an article published outside of this blog, I wrote about their previous multibillion dollar acquisition DoubleClick as a parallel for Groupon saying,

"Google is many things, but if there is one thing Google has not been, it's an ad company; there is some slight irony there given how they make their money. It's not that Google isn't an ad company per se; it’s that they are much more a technology company that transformed how ads were bought. DoubleClick on the other hand relied heavily on technology, but they looked more like a a company selling technology than what we think of as a technology company. Not surprisingly, the integration of the two had some challenges, a culture clash being one of them, and it took almost two years before the fruits of that integration saw themselves played out in the industry. Yet, when viewed with today’s lenses, that purchase qualifies as nothing short of a major victory. The question now is, does history have a way of repeating itself?"

As for Groupon, we could say that 40 million people can't be wrong. That was the most recent figure of their subscriber count, up some ridiculously large number from a year ago but as important, up double digits from a month ago. The once a day email of daily deals that inadvertently answered the question of how do you solve the local advertising challenge. Groupon was far from the first to aggregate deals from local merchants. IAC’s Entertainment book has been doing this since any who founded Groupon were born. Restaurant.com also has an impressively large collection of coupons available in an enormous number of metropolitan areas.

Groupon, though, added the rocket fuel to the local couponing model by a) not charging an upfront fee to the merchant (or demanding they give the discount away for free), and b) giving the deals a scarcity element. They last for no more than 36 hours. While not an issue today, initially, merchants could feel safe knowing that the deal would only be valid if a certain number of patrons purchased it. It wasn’t just discounts any more, it was pre-paid customers without brand degradation. Groupon hit upon a model that works for consumers, works for merchants (by and large), and works for media buying.

Groupon - The Real "Deal?"

In thinking about Groupon's growth and success, I was reminded of an article that Michael Arrington wrote, where he questioned whether Groupon was really that special. He compared Groupon to eBay and its lack of network effect. The larger Groupon grows, the larger it grows without exerting pressure on its peers to not grow. On the other hand, when eBay grew, it took away the ability for others to grow. The better eBay got - more buyers and sellers, - the better eBay got - even more buyers and sellers. As a result of the network effect, eBay is in a position of dominance that allows them to control their margins, unlike Groupon where “competitors саn flourish аnԁ margins wіƖƖ ɡеt crushed.”

I spoke to an investor in Groupon about another major criticism of Groupon, that anyone can start a daily deal site. The investor I spoke to agreed in part about the ease in which another daily deal site could form, but he pointed out that scaling the sites is the biggest challenge. Doing that takes more than just money to buy ads, another common jab thrown at Groupon. I did a quick view of the Top 25 daily deal sites, and the spread between the top five (really the top two) and the rest is monsterous.

Plurality

One comment among all others has stuck with me when any discussion of Groupon comes up. It was written by one of the sharpest minds and one of the best CEO/entrepreneurs I've been lucky enough to know, Alex Rampell of TrialPay. He wrote, on the topic of Groupon vs. eBay and the network effect:

The second sentence explains the “winner take most” paradigm precisely - a plurality yet a distinct minority. You’ll find plurality used most often in politics. I had to look the term up, and it refers to a situation where the “number of votes cast for a candidate (in a race of more than two candidates) is greater than the number cast for any other candidate but not more than half the total votes cast.” Sounds exactly right, and by that definition Groupon has a plurality.

Facebook and eBay are two network effect driven businesses where the winner takes all. Performance marketing, specifically, the CPA network space, is certainly a winner take most. Nothing may seem like a threat to Facebook right now; then again, nothing seemed like a threat to MySpace. These winner take all or almost all businesses get blindsided by those that make subtle yet significant innovations. Google did this to Yahoo in search, Facebook to MySpace. If eBay falters, which it might, the victor will not have created just an online auction place. It will have innovated and attacked eBay not on fees or through features, but by solving a problem better.

Lessons in Plurality for CPA Networks

What we like so much about this entire conversation are the similarities between it and world of performance-based marketing / cpa network. I’m sure there are no shortage of industries that fall into the low barrier to entry / winner take most / economies of scale making the difference model. It’s just amazing to hear the performance marketing industry so nicely explained. Until reading this comment, it seemed as though perhaps it was the barriers to entry that was the challenge for the cpa space with regards to an exit. Now, it might seem as though that isn’t the case. It’s a factor, but it’s not a problem just as winner take most is not a problem.

The real problem for the cpa network space is the economies of scale. They matter - if you have more traffic you get better pricing; if you have better pricing, you can buy more traffic and so on. What’s missing is the ability for a company to achieve economies of scale that continue to separate it further and further from the pack. There is no Amazon or Wal-Mart of the performance marketing space. Lots of McDonalds and Wendy’s which would be fine if they could break out and hit those companies like numbers.

Besides economies of scale, the other thing we’ve learned comes back to who and why a company could topple eBay. It may require the new site to leverage the network effect. It may not, but no matter what that new site, just like the David’s that take down the Goliath, do so by focusing on the problem that needs solving. Not to invoke Steve Jobs and Apple, but chances are (as overheard from another public company CEO) that if Jobs simply listened to what users wanted, he wouldn’t have created the iPod or the iPhone. By listening to what needed solving Apple created the better mousetrap.